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Notes -
What is "price gouging"?
I hear it a lot lately, specifically as something that grocery stores are doing with food prices.
My instinct is that if retailers raises prices, even if only because they think customers will pay more, and then customers do pay more, then that is the new market price. As such, there can't really be "gouging" by definition, no matter what price retailers set.
I think price gouging refers to suddenly raising prices in the wake of a supply shock, or to otherwise take advantage of customers who can’t go elsewhere, and it’s bad because it’s essentially a localized monopoly. For example, excessively pricing prison phone calls is price gouging, and it’s basically using county level corruption to establish a small-scale monopoly. Or suddenly raising the price on necessities in the wake of a natural disaster(eg bottled water after a hurricane).
Yeah, but this is only if you pretend that the larger market has ceased to exist.
In a world where price gouging is 'allowed' and suppliers know they can sell a particularly useful or important good for 2x the normal price after a natural disaster, then they'll be much more likely to start sending additional supplies of that good into the disaster zone, without any additional prompting. This will increase the supply of available goods so that there are fewer shortages and should equalize the price to some more agreeable level.
So allowing price increases in the short term ensures ample supply of important goods in the longer term, which is rather important in the wake of a disaster/supply shock.
And this makes imminent sense because moving goods into an emergency/disaster zone tends to carry additional risks and difficulty so higher prices would make sense in this instance. If you aren't allowed to increase the price, then why would you send your goods into the disaster area vs. sending them anywhere else where you can get the same price?
Perhaps the most ridiculous thing is when price gouging laws are 'augmented' with other restrictions, usually caps on how many of [item] can be purchased at one time, so basically, they make the natural method of limiting overuse of scarce goods illegal, and replace it with an unnatural and arbitrary method.
Perhaps the ultimate in unseen benefits would be legal price gouging would encourage someone to keep stockpiles of useful goods in or near possible disaster areas on the expectation that they can profit by selling at a premium if disaster actually strikes.
Otherwise, there's very little incentive to stockpile and thus you're all but ensuring that a shortage occurs.
"Bad" gouging is about raising prices beyond compensation for (1) risk and delivery costs, and (2) demand increase. Legality of price gouging increases incentive for profit seekers, yes. But if they are profit seekers, why not cooperate and arrange high cartel prices for this short period of time?
Why pretend that market never fail? Especially during disruption and uncertainty of a disaster, when there might be not so many arbitragers rushing to close all price differentials.
Could you provide a brief example of this method?
You could, but it's still a strong signal that will draw outsiders to the local market in order to capture the profits. And what coordination method do you use to ensure compliance amongst your cartel? All it takes is one defector to undercut the rest.
Don't have to. Just have to assume their failures are less frequent and less egregious than government failures, and are certainly corrected faster, since some government failures just never get solved.
You can convince me there's a specific market failure in certain conditions. You probably can't convince me that a governmental solution will actually work out better!
Have you noticed how Gas prices went up abruptly earlier this year?
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A Steelman of Anti-Gouging-ism
Market-based allocation, in emergencies, denies the poorest access to $RESOURCE1 in any quantity, no matter how dire their need; meanwhile, the wealthiest have no requirement to consume less $RESOURCE1, as even 100x inflated prices are, to them, couch change.
Under direct allocation, however, the emergency has the same effect on everyone: they can get essential quantities of $RESOURCE1, but cannot consume as much as they might desire.
If it is possible, but expensive, to maintain reserve capacity of $RESOURCE1, such that, even in an emergency, supply will be sufficient to meet even non-essential demand, then the outcomes for a rich person are as follows:
Market-based allocation/build stockpile: plentiful $RESOURCE1 in emergency for self and others, higher expenses in other times.
Market-based allocation/no stockpile: plentiful $RESOURCE1 in emergency for self but none for others, lower expenses in other times.
Result: Rich person has no incentive to maintain reserve capacity.
Direct allocation/build stockpile: plentiful $RESOURCE1 in emergency for self and others, higher expenses in other times.
Direct allocation/no stockpile: limited $RESOURCE1 in emergency for self and others, lower expenses in other times.
Result: rich person has more incentive to maintain reserve capacity, as they can only continue their normal consumption habits in emergencies to the same degree as their impecunious neighbours.
Thus, prohibition of price-gouging falls under the umbrella of "ways to align the incentives of the powerful with the public good".
Even given the progressive 'love the poor give them everything', this is an argument for state intervention to buy the good at the market price and give it to poor people, not an argument to ban selling it at a higher-than-usual market price. If poor people can't buy it at $5000, a lot probably can't at $500 either, but some being able to at $5000 is better than nothing (and, if it's $5k, that - sort of, if you assume basic economics generalizes everywhere - means that there aren't means to bring the good to everyone who wants it, at least who can pay $500, so giving it to those who can pay $5k vs giving it to ... nobody, is the issue)
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This is a good response, but my instinct is still that market forces should still be in effect. If prison phone prices are too high, few prisoners will make calls and the provider should be incentivized to lower prices to maximize total profits. Likewise with bottled water.
There's nothing wrong with that position, but other people's instinct says otherwise. That's really all there is to it: price gouging doesn't feel fair to people regardless of what economists may say on the topic.
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